Bank of Canada says rates are too stimulative, may need to go above neutral

div classBodysc17zpet90 cdBBJodivpBy Julie Gordon and David Ljunggrenp

pOTTAWA Reuters – The Bank of Canadas policy rate, at 1, is “too stimulative” given soaring inflation and interest rates may need to go above neutral because parts of the economy have become less sensitive to increases, an official said on Thursday.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pDeputy Governor Toni Gravelle, speaking to economists in Montreal, also said the central bank would likely revise up its nearterm inflation projections, as the “perfect storm” of global and domestic price increases continue to persist.p

p“Our policy rate, at 1, is too stimulative, especially when inflation is running significantly above the top of our control range,” Gravelle said. “We need our policy rate to be at more neutral levels.”p

pHe said the Bank was moving quickly to get back to the neutral range – between 2 and 3 – and reiterated it was prepared “to be as forceful as needed” to cool demand. p

pThe Bank of Canada made a rare 50 basis point increase last month and is widely expected to go ahead with another oversized increase at its June 1 decision. Money markets are betting the policy rate will be around 3 by yearend.p

p“We may also need to raise rates above neutral because parts of the economy may be less sensitive to rates hikes than in the past,” Gravelle said, noting households have more savings and less nonmortgage debt than before the pandemic.p

pDemand for housing could also prove more persistent in the face of rate hikes than expected, he said. p

pAlternatively, the central bank could pause as it enters the neutral range if price increases reverse course or if the housing market slows more than expected.p

p“Our basecase scenario includes a slowdown in housing activity. But we could see a largerthanexpected slowdown due to higher indebtedness and unsustainably high housing prices,” Gravelle said.p

pHe reiterated the central bank is not on “autopilot” and does not have a specific “terminal” rate. p

pInflation in Canada hit a 31year high at 6.7 in March, its 12th consecutive month above the Bank of Canadas 13 control range and more than triple the 2 target.p

pThe Canadian dollar was trading 0.3 lower at 1.3030 to the greenback, or 76.75 U.S. cents.p

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pp Reporting by Julie Gordon in Ottawa Editing by Kirsten Donovanp

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